That’s the question the Templeton Foundation posed to an array of smart people (e.g., Jagdish Bhagwati, Bernard-Henri Levy, John Gray, Michael Walzer, Michael Novak, Kay Hymowitz, and others) a while ago. Their diverse answers, including some videotaped responses, are archived here. It’s well worth spending some time perusing the various arguments. I incline to John Gray’s response, which, in essence, was, “It depends.” Excerpt:

In the end, the answer to this question depends on how one conceives the good life. What a traditional moralist views as family breakdown may be seen by a liberal as the exercise of personal autonomy. For the liberal, personal choice is the most vital ingredient of a good life, while conservatives may regard the preservation of valuable institutions to be more important. With regard to contemporary Western societies, I tend to a liberal view. But the important point is not so much which of these conceptions one adopts. Rather, it is this: though free markets reward some moral traits, they also undermine others. If they emancipate individual choice, they at the same time corrode some traditional virtues. One cannot have everything.
The moral hazards of free markets do not mean that other economic systems are any better. Centrally planned systems have corroded character far more damagingly and with fewer benefits in terms of efficiency and productivity. The planned economies of the former Soviet bloc only functioned – to the degree they did at all – because they were riddled with black and grey markets. Corruption was ubiquitous. In the Marxian model, the greed-fuelled anarchy of the market is replaced with planning based on altruism. But actual life in Soviet societies was more like an extreme caricature of laissez-faire capitalism, a chaotic and wasteful environment in which each person struggled to stay afloat. Homo homini lupus – man is wolf to man – was the rule, and altruism the exception. In these conditions, people with the most highly developed survival skills and the fewest moral scruples did best.
No economic system can enhance every aspect of moral character. All rely to some extent on motives that are morally questionable. Greed and envy may be vices, but they are also economic stimulants. An economic system is good to the extent that it harnesses human imperfections in the service of human welfare. The choice is not between abstract models, such as the free market and central planning. In the real world of history, neither has ever existed in the form imagined by its advocates. No, the true choice is between different mixes of markets and regulation, none of which will ever be entirely morally benign in its effects. A sensible mix cannot be achieved by applying an ideal model of how the economy should work. Different mixes will be best in different historical contexts. But one thing is clear: a modern market economy cannot do without a measure of moral corrosion.

I like too Bernard-Henri Levy’s observation that the lack of a free market corrodes moral character. Consider:

I think back to the long journey I made through Central and Eastern Europe just after the fall of the Berlin Wall. I can still hear my Czech, Polish, Bulgarian, Hungarian, and East German friends explaining to me that the Communist era, those long decades in a society not at all governed by the rules of the market, had caused them, in their hearts and souls, to develop a certain number of vices, even defects – and that they themselves did not know how long it would take to get rid of them.
Consider, for example, the habit of acting irresponsibly, that is, the inability to take risks, even to make decisions. I vividly recall an East German engineer who seemed perfectly normal, a democrat in her soul and a dissident for years, but who burst into tears the day I asked her to lay out the itinerary for the day we would be spending together. “They taught me not to decide,” she said, between sobs. “It is like an amputation, an excision, as if they physically came in and corroded a section of my brain.” Imagine a deep selfishness with neither nuance nor recourse, much more radical than the self-interest of market societies. From the viewpoint of those who survived, that is the true balance sheet of Communism. These are the proofs of corruption, of a corrosion of character, brought about by the actual absence of a free market.

As this story from today’s NYT front page makes clear, this is far from an abstract question. The piece is about people who can afford to pay their mortgage on properties worth far less now than they were when the owners bought them, but who are thinking of walking away from their debts because it makes economic sense. Excerpt below the jump:

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.
They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.
“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”
Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

What happens when this becomes not morally taboo, but perfectly acceptable? What are the long-term, broad consequences for our economy?